Financial crisis: Iceland nationalises bank and seeks Russian loan

The Icelandic government has seized the country's second-largest bank and pleaded with Russia to hand it a £3bn life-line loan in order to stave off "national bankruptcy" as it continued to come to grips with its harsh new economic realities.

By Rowena Mason, in Reykjavik

7:46PM BST 07 Oct 2008

Prime Minister Geir Haarde rushed emergency measures through the Nordic nation's parliament to nationalise Landsbanki and give the country's largest bank, Kaupthing, a £400m loan to bolster its balance sheet.

Landsbanki has been put into the control of the Icelandic financial regulator to prevent the meltdown of the country's financial system, triggering the collapse of its popular internet savings arm Icesave.

Mr Haarde confirmed that he was sending a delegation to Iceland's "new friend" Russia to negotiate a £3bn capital injection into the country's finances, after the country's traditional Western allies refused to help the collapsing banking system.

The loan from Russia will be used to shore up the Icelandic krona, which tumbled by 30pc on Monday, rather than the country's two nationalised banks, Landsbanki and Glitnir.

However it was reported that Iceland chose not to seek the help of the International Monetary Fund, a suggestion allegedly first made by Japan.

The Icelandic krona has now been pegged at 131 against the euro as an emergency measure and the stock exchange has banned short-selling of bank shares.

The new manager of Landsbanki, Halldor Kristjansson, placed part of the blame for the nationalisation of the bank on savers trying to withdraw their money from Icesave, which has 300,000 British customers with a collective £4bn of savings.

Asked about the run on Icesave, Mr Kristjansson said: "That by itself caused additional problems on top of everything else. There are so many interwoven factors. That wasn't the main problem, although it was very big."

The UK Financial Services Compensation Scheme said it will contact Icesave customers to give them details of how to apply for compensation.

In an interview with The Daily Telegraph, Iceland's prime minister said it was too early to tell what effect the nationalisation of Landsbanki and the cash injection for Kaupthing would have on the British economy.

Icelandic investment company Baugur, which owns dozens of High Street chains, from House of Fraser to Hamleys, has borrowed money off both Kaupthing and Landsbanki.

Iceland's near financial meltdown has been seen as the biggest yet faced by any country over its financial sovereignty in the 14-month-old credit crisis.

The Icelandic government has said a drop in the country's standard of living is inevitable while the economy returns on its traditional fishing industry. It has vowed to shrink the financial services sector that grew to nine times the size of its GDP.

At a televised press conference, Mr Haarde said Iceland was at no risk of defaulting on its sovereign debt.

Mr Haarde has admitted: "A lot of the banks' business is in Britain, so it is likely that Britain might well be affected."